Posted: 05 Jun. 2020 4 min. read

COVID-19 Impacts on Supply Chains, Sustainability and Climate Change

 

The COVID-19 crisis has put sustainability into the spotlight. It has exposed vulnerabilities across government and industry, and put the value of sustainability into sharper focus than ever before. Here are some of the specific impacts we’re seeing, and how things will need to change in the future as we face what we call “the next normal.”

COVID-19 Impacts the Supply Chain

There has been a broad-based effort to make supply chains more resilient in recent years, but most organizations did not figure a pandemic into their strategies, so their supply chains are not nearly as resilient as they thought they were. Many organizations have experienced some form of supply chain disruption – either through suppliers going offline, a sudden spike in demand or, as has been seen with medical personal protective equipment (PPE), both. 

What lessons can be learned from this crisis? The most important one is the need for more transparency throughout the global supply chain. To achieve true resilience, enterprises will need to gain visibility into their entire supply chains, beyond the tier 1 suppliers. Most supply chains extend to tiers 2, 3, 4 and often beyond – it is critical for enterprises to understand who these suppliers are, where they are located, where they source from, their risk exposure, and so on.

For example, a company in Canada might decide it is too heavily dependent on Asian suppliers, so it diversifies by adding suppliers in Latin America. But if those Latin American suppliers source components from tier 3 and 4 suppliers located in the same Asian industrial cluster as the current suppliers, then the diversification will not deliver the anticipated resilience. If the company had supply chain transparency, it would be able to identify this vulnerability and require that any tier 1 and 2 suppliers in Latin America either avoid sourcing components from the same cluster, or have a strategy to carry enough inventory to weather multi-month disruptions.

Supply Chains Re-Examined

In the next normal, organizations will need to reassess their supply chain risks and may need to redefine their supplier relationships. In the past, cost has been the primary criterion for choosing suppliers. In the next normal, there will need to be a more sophisticated cost/risk analysis that factors in transparency. This will be a requirement for achieving true supply chain resilience, which may include paying more for local suppliers.

Cost differentials between some geographies have been narrowing over the last decade, so the potential increased short-term costs of taking a risk-based approach is significantly less than it has been in the past. And, as we have learned, taking this type of risk-based approach will deliver enormous benefits during future disruptive events. So, organizations need to determine the supply chain design that will deliver the most resiliency in the event of another large-scale disruption.

COVID-19 Shines a Light on Operational Sustainability

While many organizations may need an overhaul and a re-start for the next normal, it will be interesting to see where investment flows following the pandemic. Will companies and industries that were identified as not sustainable before this crisis receive the same investor interest? Or will investors choose to back companies and industries which are more aligned with a sustainable future, and that generally showed greater resilience during the pandemic? COVID-19 has a way of accelerating trends because it exposes and inflames existing vulnerabilities (as we already discussed with supply chains). This could cause shifts in investment that accelerate the declines of industries and companies that were already waning before the coronavirus.

The post-COVID world presents an opportunity to re-invest in a new way. Rather than investing solely to restart the “old normal,” it likely makes more sense to invest in the next normal. Crises always bring with them a degree of opportunity, and as the global economy starts to come back to life, there is a major opportunity for investment in more sustainable companies and industries that will be far more resilient against future global disruptions.

Some investors are looking closely at this situation. One obvious example is the fossil fuel industry.  We are now seeing plummeting demand and prices as a result of the pandemic, which place dozens of businesses in serious difficulty. Just before or during the crisis, some industry leaders, such as BP, Shell or Total, have made commitments to be net-zero carbon by 2050. Investors have to ask themselves: Is this really going to happen? And if so, do these companies merit greater investor interest than others, because they are committed to a more sustainable future? Or, will investors turn their attention to other pure-play companies working on alternate forms of energy, which will accelerate the transition from fossil fuels to more sustainable energy sources?

Will COVID-19 Impact Climate Change Initiatives?

The response to COVID-19 has also exposed vulnerabilities in how the world functions in the context of a global threat. We have seen that there is little political alignment between different countries and regions, and there is little alignment between government and corporate sectors, so there has not been a coordinated worldwide effort across containment, testing, prevention and treatment.

This “every country for themselves” approach has been insufficient in the face of COVID-19. And it shows how ill prepared the world is to face another global challenge that is even more profound than the pandemic: climate change. There needs to be a coordinated response to this challenge from world leaders, which is not happening. Instead, we see countries - and organizations and industries within countries - pursuing their own interests, rather than those of the world.

Will the pandemic inspire greater levels of global cooperation against global problems? Will COVID-19 provide a lesson in how it is in each country’s best interest to operate in a way that promotes the world’s best interests?

It often requires a great deal of pain to cause fundamental societal change. COVID-19 is providing that pain right now, and it will cause a fundamental shift in investment and activity toward sustainability. The question is: how far will these changes go? It is almost a certainty that there will be a massive reassessment and realignment of supply chains. It is also likely that investors will factor sustainability much more strongly in their evaluation of opportunities. The ultimate litmus test will be climate change – if COVID-19 can break the “every country for itself” mentality, then it could become the most meaningful step forward toward addressing this global issue. These are all important trends to watch in the next normal.

 
 
 

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Key contact

Olivier Jan

Olivier Jan

Partner, Deloitte France Sustainability Services

Olivier is a Partner in Advisory at Deloitte France Sustainability Services. This practice provides advice and guidance to corporate and public entities in all of their sustainability and social challenges. Olivier began his career in a consulting firm specializing in life cycle analysis, and over the years has gained significant experience serving clients on procurement transformation, supply chain and operations practices. He joined BIO Intelligence Services in 2008 before it was acquired by Deloitte in 2013. Olivier manages projects and advises corporations to design their sustainability strategy and improve their environmental performance.